Q. I am 28 years old, working in the private sector, and want to start planning for my retirement. Assuming I want to retire at the age of 60, and want to have a corpus of ₹2 crore, what is the amount I should have after 32 years that will be equivalent to ₹2 crore considering all factors like inflation, etc. Besides that, I would also like to have a fixed monthly income equivalent to 1 lakh in value today. What are the best suited options/ financial instruments I should start investing in to ensure this? Are NPS and PPF better since they come with sovereign guarantee? Also, which instrument is wise considering tax implications, both today as well as at the time of withdrawal.
A. It is not clear whether you want ₹1 lakh per month post retirement or right away. We will assume if it is post retirement. When you plan for your retirement, it is best you decide how much monthly income you want then, rather than fixing a lumpsum you wish to have, without knowing if that lumpsum will last. If ₹2 crore is the amount you want after 32 years, then ₹10,000 per month if it earns 9% on an average for the next 32 years, should comfortably take you there.
However, if you wish to have ₹1 lakh per month of income starting retirement (in today’s value) then it will be ₹3.5 lakh per month 32 years hence, assuming inflation at just 4%. That means your corpus requirement will jump to ₹6.9 crore to be built in these 32 years. That also means you will need about ₹31,000 pf savings per month generating at least 9% per annum for foe the next 32 years. You can use a combination of NPS, PPF and equity index funds to invest for your retirement. You could consider using NS more for your debt allocation and use the equity index funds for equity exposure. Of course, NPS is not fully tax-free on retirement as the pension is taxable. You will seldom get options which are tax-free at all stages. So, instead of focusing on tax efficiency, please focus on what will lead you to your goal.
(Vidya Bala is co-founder, primeinvestor.in)
Q. Can you suggest some good mutual fund companies because these days it's hard to distinguish between the fake and genuine company. Please suggest the procedure for investing through mutual funds, the minimum investment, the average rate of return and the risks involved. I can search for these things on the Internet or YouTube, but I cannot trust everything I read or see there, that's why I am asking you.
Aarati Krishnan replies : It is good that you are keen to identify regulated investment options and to invest in them after seeking detailed information, instead of simply going by what you read online. All mutual funds are required to register with SEBI before launching products for investors. You can check the list of registered mutual funds at the SEBI website here: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=23
There are four key routes for investing in mutual funds. You can invest through mutual fund distributors who are registered with the Association of Mutual Funds of India, who will facilitate your transaction. To check if the distributor is registered, you can ask for his or her ARN (AMFI registration number). You can invest through brokerages and platforms offered by banks and brokers, in the ‘regular’ plans of mutual funds. When you use these routes, you incur commission to compensate these intermediaries, which is included in your fund’s costs. You can also invest in mutual funds through their ‘direct’ plans where you save on this commission. This can be done by either directly registering on each fund’s website and investing online or through platforms offering direct investments such as Kuvera, Groww and Zerodha Coin. While you save on costs with direct investments, you will need to select your asset classes and funds on your own. You can also engage the services of a registered investment adviser who can advise you what funds to buy for a flat fee. Mutual funds allow minimum investments as low as ₹500. You usually get to choose between lumpsum investments (investing a sum at one go) and Systematic Investment Plans (SIPs), where you can set up auto-debits to invest a regular amount every month in chosen mutual funds. This allows you to build a sizeable corpus over time. Mutual funds are market-linked products and there are many types of mutual funds. There are mutual funds which invest in company shares, in company bonds, government bonds, money market instruments and even gold. There are also funds that combine one or two of these assets. So it is difficult to tell you what the average rate of return would be across all these types. Generally, you should choose a mutual fund category based on your investment horizon, your ability to handle risks (volatility in your capital value and returns) and your return expectations. It would be good to engage the services of a qualified investment adviser or financial planner who can help you map out your financial goals and start you on your investing journey. You can get a list of RIAs in your location here